EconPapers    
Economics at your fingertips  
 

Debt, Inequality and House Prices: Explaining the Dynamics of Household Borrowing Prior to the Great Recession

Alessia De Stefani

ESE Discussion Papers from Edinburgh School of Economics, University of Edinburgh

Abstract: Growth rates of income inequality and household debt levels are strongly correlated within OECD economies. I explain this evidence through the role of collateral capacity and mortgage lending. My analysis of disaggregated US data in the decade preceding the 2007/2008 financial crisis shows how the rise in income inequality across US regions was associated with a higher than average increase in house prices. Exploiting geographical variation across US regions, I apply a methodology which can be considered similar to a diff-in-diff approach. I show that between 1997 and 2007 a 1% increase in inequality, measured as the ratio of top incomes to median incomes, determined an increase in the the self-reported value of homes of about 0.6% across US states and 0.7% across metro areas. Inequality therefore induced a wealth effect in homeowners. I also show that the increase in housing wealth was associated with higher consumption, despite constant real income. A 1% increase in top incomes induced a 0.46% increase in 'non-rich' homeowners' consumption, and a 0.18% increase in mortgage debt. The wealth effect experienced by homeowners living in high-inequality regions can therefore explain the link between inequality and house-hold debt without recourse to behavioral explanations such as the 'conspicuous consumption' hypothesis.

Keywords: Consumption Behaviour; Credit; Inequality; Veblen Effects; House Prices (search for similar items in EconPapers)
JEL-codes: D12 D14 D31 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ure
Date: 2015-09
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.econ.ed.ac.uk/papers/id259_esedps.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:259

Access Statistics for this paper

More papers in ESE Discussion Papers from Edinburgh School of Economics, University of Edinburgh 31 Buccleuch Place, EH8 9JT, Edinburgh. Contact information at EDIRC.
Bibliographic data for series maintained by Research Office ().

 
Page updated 2019-11-17
Handle: RePEc:edn:esedps:259